The Indian stock market has been riding a wave of bullish momentum, with a series of record-breaking rallies showcasing robust investor optimism. Recently, the Sensex broke through the 80,000-point milestone, while the Nifty crossed the 24,000 mark just a week earlier. These achievements underscore the strong upward trajectory and positive sentiment propelling the Indian stock market forward.
A key driver behind this surge is the heightened investor confidence following the re-election of the Modi-led NDA government for a third consecutive term. This political stability has infused a sense of continuity in policy direction and economic reforms, bolstering investor sentiment. Moreover, the resurgence of foreign investor inflows into India, combined with favorable macroeconomic indicators and improving global economic conditions, has further fueled this optimism.
Market experts are bullish about the future, expecting this momentum to carry on throughout the year. The upcoming Budget and the release of June quarter earnings are now in focus, with investors keen to see how these will influence market trends and sentiment in the coming months. Strong retail investor participation, optimistic growth outlooks for Indian corporations, and favorable equity taxation policies have all contributed to the positive mood in the markets.
It’s not all smooth sailing. Several potential risks could dampen market stability and investor confidence. Apurva Sheth from SAMCO Securities pointed out global economic uncertainties, particularly the stance of the US Federal Reserve on interest rates amid slowing GDP growth. The US GDP growth rate recorded only 1.3 percent for the quarter ending March 2024. If growth slows further and the US economy slips into a recession, it could hurt both global and Indian financial markets.
Sumit Jain (Deputy CIO at ASK Investment Managers) emphasized the impact of unforeseen global events that could reduce global risk appetite and, consequently, affect Indian markets. Meanwhile, Sonam Srivastava, Founder and Fund Manager at Wright Research, highlighted other potential risks, including geopolitical conflicts, political uncertainties, delays in rate cuts, and inflation. A delay in the RBI’s anticipated normalization of interest rates could lead to a resurgence of inflation, possibly necessitating a sharper rate hike later, unsettling markets.
Political instability within India, particularly if upcoming state elections in Haryana and Maharashtra do not favor the ruling government, could introduce policy uncertainties and deter investor confidence. A weaker monsoon season, critical for India’s agricultural sector, could also dampen economic growth and corporate earnings, posing additional risks.
Hemang Kapasi, Head of Equities at Sanctum Wealth, believes political risks are significant, given the recent narrow electoral victory for the incumbent government. Any shift towards populism in response to state election outcomes could divert funds away from investment projects. Furthermore, any adverse announcements in the upcoming Budget, particularly regarding capital gains tax, could also negatively impact the market.
Ravi Singh, SVP of Retail Research at Religare Broking, noted that political tension and instability, both domestically and internationally, are major risks. International conflicts or trade disputes can disrupt global supply chains, cause market volatility, and unsettle investors. Domestically, political instability can lead to uncertain policies, affecting business confidence and investment decisions.
Regulatory actions and high valuations also pose significant risks. Sheth from SAMCO Securities highlighted the overvaluation of Indian markets, particularly in the mid-cap and small-cap segments, compared to other emerging markets. Kapasi warned of potential regulatory interventions targeting market froth, especially in small-and-midcaps, which could lead to volatility and capital outflows.
Despite the current bullish sentiment, investors must remain cautious and vigilant. Prudent risk management strategies, such as maintaining diversified portfolios and staying informed about market dynamics, are essential for navigating potential disruptions effectively in the upcoming months of FY24. By doing so, investors can mitigate risks and capitalize on opportunities in a volatile but promising market environment.
